The country’s major players are investing large sums of money to keep up production numbers in gold and massively expand Peru’s copper output
Peru is currently the sixth largest gold producer worldwide. In 2005, output peaked at 6.7 million oz; last year it fell significantly from 2009’s 5.92 million oz to 5.25 million oz, mainly because of lower production figures from the country’s largest gold mine, Yanacocha. The site, located in Cajamarca (northern Peru) is a joint venture made up of Newmont (51.35%, operator), Buenaventura (43.65%) and the International Finance Corp. (5%). It produced 1.46 million oz of gold last year, about 500,000 oz less than in 2009, due to lower grades in the increasingly mature unit, a problem expected to be mitigated with Yanacocha’s Minas Conga project.
“The main deposit is essentially running out of oxides and the grades are decreasing,” said Roque Benavides, president and CEO, Compañía de Minas Buenaventura. “Going further we expect to maintain 2010’s level of production or increase it slightly.”
Conga is a gold-copper porphyry deposit located in the Cajamarca region with reserves of 11.8 million oz of gold and 3.2 billion lb of copper. The environmental impact assessment (EIA) has already been approved by the Peruvian government and a final thumbs-up to move the project into production is expected during 2011. The required investment will be in the region of $3 billion. Preliminary production figures for Conga, whose startup would be in 2014 or 2015, are 585,000 oz gold and 72,000 tons of copper per year.
Through Buenaventura’s own operations and its stakes in other ventures, the company stands as Peru’s most important player in precious metals with a consolidated production of about 1 million oz of gold and 13.7 million oz of silver in 2010. The NYSE-listed Peruvian company’s latest production unit is La Zanja (53% Buenaventura: 47% Newmont) which started production in September and will yield 100,000 oz gold annually at cash costs of around $400/oz. “La Zanja is an emblematic project for us: it is the startup of a mine in Cajamarca, where we have had lots of social issues. The fact that we have been able to reverse the situation is very important,” said Benavides. Buenaventura also holds a 40% interest in the Tantahuatay gold and silver project, currently under construction, that should produce up to 100,000 oz gold and 426,000 oz silver annually starting during the second half of this year.
Peru’s second largest gold mine is Barrick’s Lagunas Norte, whose production was 807,000 oz gold in 2010. The mine is one of Barrick’s treasures as it offers very low production costs. “For two consecutive years, Lagunas Norte has been Barrick’s most profitable operation. Capital costs in this mine have been low because the ore was right at the surface. It is a low-cost heap leach operation; infrastructure was not bad and Peruvian wages are competitive,” said Darrell Wagner, general manager in Peru for the Toronto-based company.
Barrick has a second operation in the country, Pierina, that reached 191,000 oz gold last year. It is a mine that was initially planned to shut down in 2009, but whose life has been extended until 2014. “We do brownfield exploration every year in both mines. Certainly Lagunas Norte offers more potential since there is more land to explore, while Pierina has been in operation for longer and is maturing,” Wagner said. Both Lagunas Norte and Pierina are 100%-owned by Barrick, although in the former case the company pays a 2.5% royalty to the Peruvian state.
Together with Newmont and Barrick, the other main multinational active on the gold front is Gold Fields of South Africa, which runs the Cerro Corona gold-copper mine in Cajamarca. The operation, started in 2008, reached full production in 2009 and finished last year with 160,000 oz gold and 43,000 tons of copper produced.
“Peru has been our first step into South America,” said Diego Ortega, head of legal and corporate affairs at the corporation’s Peruvian subsidiary, Gold Fields La Cima. “Gold Fields focuses on gold deposits and Cerro Corona is the first operation where we also have copper production. Last year we managed to place Cerro Corona as the best operation of the group and we are proud to have consolidated our production levels and our relationship with the locals, through transparent information and participatory work.”
Cerro Corona has reserves of 5.5 million oz (gold equivalent) and further resources of 2.5 million oz. Moreover, the Gold Fields group controls the Chucapaca project (southern Peru) where a discovery was announced in May 2010 at the Canahuire gold-silver-copper deposit, with inferred resources of 5.6 million oz gold equivalent. The joint venture company in charge of the project is 51% owned by Gold Fields and 49% by Buenaventura. According to current calculations, the project could be put into production by 2015, and would demand an investment similar to Cerro Corona, in the region of $750 million.
As well as Buenaventura and the main foreign players, there are a number of other national producers with sizeable gold assets. These include Consorcio Minero Horizonte (193,000 oz in 2010) and the three mines run by Guido del Castillo (Aruntani, Arasi and Anabi; 320,000 oz among the three). Finally, we cannot ignore all the gold from small miners and informal operators. In the jungle area of Madre de Dios in south-eastern Peru, production is estimated to have reached 610,000 oz last year.
The question on the table is whether Peru will be able to maintain its gold production levels. For Guido del Castillo, president of Aruntani, there is still much to be found. “Looking at the size of the industry it is very difficult to say the exploration of gold will stop,” del Castillo said. “The Eastern Andes region is totally unexplored. Work in this area is more expensive because the rocks are covered by vegetation but there is tremendous potential.”
“Of the $41 billion that will be invested in mining projects, 28% will be directed to gold projects, moreover Peru has very low production costs, which is a key factor. The prospects are very positive for precious metals,” said Miguel Carrizales, president, Institute of Mining Engineers of Peru.
And yet, the rising star in Peru is not gold, but copper. Production of the red metal was down by 2% in 2010, but this is nothing to worry about considering a number of mega-projects are going to give an enormous boost to the business.
Peru, the Next Chile?
Peru’s total production of copper in 2010 was 1.25 million mt, the major share of which came from Southern Copper’s Toquepala and Cuajone units (334,000 mt altogether), Antamina (325,000 mt), Cerro Verde (operated by Freeport McMoRan, 312,000 mt) and Xstrata’s Tintaya (93,000 mt). Over the next few years, the country is expected to receive a truly substantial investment in copper.
Grupo México-owned Southern Copper plans to spend nearly $900 million this year in the expansion of its operations in Toquepala, Cuajone and the Ilo metallurgical complex (smelter and refinery). Furthermore, the company is waiting to receive approval for the EIA of the Tía María project, one of Southern’s priorities, which is facing strong opposition from anti-mining groups, even though the project would be run using desalinated seawater. Provided these problems are solved, the $934 million project is expected to produce 120,000 mt/yr of copper cathode. Beyond this, the company has another copper project called Los Chancas at the feasibility stage.
Antamina, a BHP/Xstrata/Teck/Mitsubishi joint venture, is a massive operation in both copper and zinc (427,000 mt of the latter last year) that is undergoing a $1.3 billion expansion. The new investment will increase throughput from 94,000 mt/d to 130,000 mt/d by the end of 2011, following a 77% expansion of the reserves back in 2008. Just before he finished his term as president and CEO of Antamina at the end of 2010, Ian Kilgour gave us more details.
“The expansion expenditure is divided between an increase in the mine fleet and more plant capacity,” Kilgour said. “We are doubling our truck fleet from 54 to 118 over the next three years. We are going from four to seven shovels and we are adding three new large loaders, plus we are debottlenecking the crusher, acquiring a second SAG mill and a fourth ball mill and duplicating the power line among other aspects.
“We are increasing the life of the mine by six years to 2029,” Kilgour said. “We are confident that we will continue to increase reserves in the future so we need to think of an efficient operation as it will get bigger. Our copper grade is more or less stable (between 0.9% and 1% until the end of the mine life) but our zinc grade varies greatly depending on the area we are mining.”
Another expansion that can potentially have a great impact is at Cerro Verde, 53.56%-owned by Freeport McMoRan. The joint venture company, that produces copper as well as molybdenum, has already spent $50 million to increase throughput from 108,000 mt/d to 120,000 mt/d and is currently evaluating a major investment.
“From an economic standpoint, Cerro Verde has worked very well. Cash cost is around $0.95/lb,” said Benavides. “We are in the process of developing the feasibility for expanding the operation. It is a huge deposit with reserves for three decades. It is the type of mine that deserves to undergo expansion.” Buenaventura owns 19.3% of Cerro Verde.
For its size, Xstrata’s Las Bambas is the star of Peru’s copper boom. The $4.2 billion investment, already approved by the company, is only waiting for regulatory approvals for construction to be started (probably in the third quarter of this year). It consists of three open-pit mines and a 140,000 mt/d concentrator that will allow for an initial output of 400,000 mt of copper annually. If all goes according to the company’s plan, it will reach full capacity by the end of 2014.
In parallel to this, the company is expanding its Tintaya operation through a $1.47 billion investment to put Antapaccay, a satellite deposit, into production. The expanded Tintaya will increase its production to 160,000 mt/y (including concentrate and cathodes), moreover mine life will increase by 20 years. “Since 2004 Xstrata has developed an integrated strategy in Peru, from the start of Las Bambas as a greenfield project to the acquisition of Tintaya and the 33.75% participation in Antamina in 2006, and finally the corporate approvals for the construction of Antapaccay and Las Bambas nearly simultaneously,” said José Marún, COO of Xstrata Copper’s Southern Peru division. “The framework of economic and social stability and the respect for the rules of the game have been a key element for these decisions.”
Another large copper project expected to kick off soon is Toromocho, one of the various copper assets acquired by Chinese investors in the last five years in Peru. The owner is the Aluminum Corp. of China (Chinalco) who took over Peru Copper, a Canadian junior, back in 2008 for $762 million. Toromocho, whose EIA was approved by the Peruvian government just before Christmas, is a $2.2 billion project that will process 117,200 mt/d to produce about 178,000 mt of copper, 10,000 mt of molybdenum oxide and 4 million oz of silver annually. Mine life will be 36 years.
For this large venture to go ahead, a town of 5,000 people will have to be moved. The company is doing its best to show that a Chinese company can mine responsibly. “Chinese companies do not necessarily have the best image in Peru. Yet in our case we are perceived differently than other foreign companies, not only Chinese,” said Armando Arrieta, vice president of legal and corporate affairs, Chinalco Perú.
“We will use thickened paste technology in our tailings to avoid big accidents like the one that happened in Hungary; besides there will be no big draining problems. Also, you will probably find no one in Peru investing $44 million in a high density sludge water treatment plant to deal with an 80-year old problem that was not caused by Chinalco at all.”
Arrieta refers to the plant that will treat acid waters coming through the Kingsmill tunnel, built in the 1930s by the Cerro de Pasco Copper Corp., which is one of the many environmental liabilities Peru suffers from past mining operations.
Other copper projects in Asian hands include Río Blanco in northern Peru, controlled by the Zijin Group; Galeno, owned by Lumina Copper SAC, a consortium of Minmetals and Jiangxi Copper; and Mina Justa, the main asset of Chariot Resources that was taken over last year by CST Mining of Hong Kong. While Río Blanco is reported to be on hold as a result of Zijin’s environmental disaster in China a few months ago, there should be mining in both Galeno and Mina Justa in the next three to five years.
Size-wise, Galeno’s operation will be similar to Toromocho. Lumina Copper’s senior vice president and general manager, Richard Graeme, gives more detailed information. “Based on the scoping study, we are in the range of a $2 billion investment, but the bankable feasibility study will give more accurate numbers,” Graeme said. “The project is at an elevation of about 3,800 m, close to Yanacocha and Cerro Corona. The deposit has important molybdenum content, a bit of gold and silver and also rhenium, which is a rare earth that can also be recovered. The throughput is expected to be 110,000 mt/d. We are anticipating at least a 20-year mine life, but that could expand, depending on copper prices.”
Galeno will require a 260-km pipeline to take the concentrates to the port; a logistics challenge that is commonplace in Peru, where most of the mines are up in the Andes.
Due to its closeness to the sea, CST Mining will not face this issue at Mina Justa. The company, a recent startup with a focus on copper assets in the Asia-Pacific area, already has one operational unit, the Lady Annie mine in Australia, while in Peru the EIA of Mina Justa (70%-owned) has already received the green light from the Peruvian government. Construction should start in mid-2011.
Damon Barber, CEO of CST Mining explains the rationale behind the $250 million acquisition. “Mina Justa was a late-stage development with a completed feasibility study,” Barber said. “We just needed to provide the capital investment. We love the location, there are no altitude issues and it is close to the sea and the Pan American highway. There is access to power and water, plus we are in a mining area as there has been an iron ore mine next to us for the last 50 years.”
Estimated capex for Mina Justa is $745 million, for an expected production of 110,000 mt/y of copper (50,000 mt of which as copper cathodes). This mine should be just the starting point of the company’s relationship with Peru, Barber explained. “Last year we raised $600 million in equity; it was a very successful financing and it showed that investors are very comfortable putting their money into Peru’s mining industry,” Barber said. “We are building a new exploration team locally and we plan to invest $15 million to $20 million in exploration. Also, I would be surprised if we did not buy another asset in South America within the next months.”
The list of large mining operators aiming to start producing in Peru does not end there. Anglo American and Rio Tinto also have advanced copper projects. The latter company is working on its La Granja asset in Cajamarca, described as one of the world’s largest undeveloped copper deposits, with inferred resources of 2.8 billion mt at 0.51% copper and 0.1% zinc. Meanwhile Anglo American is trying to advance its large Quellaveco project into production, where it is facing social issues on the ground regarding water usage. Quellaveco, already at the feasibility stage, could produce 225,000 mt/y of copper; capex could be more than $2.5 billion. The company also has another project in Peru, Michiquillay, where community relations are also causing significant delays.
Finally, another copper project on route to production is Quechua, owned by Pan Pacific Copper of Japan and expected to produce 75,000 mt of copper by 2014 (capex would be $970 million).
Silver production in Peru last year was 128 million oz, 10 million oz less than in 2009. The country’s largest producer of silver is Volcan, one of Peru’s major national companies, which is listed in Peru, Chile and Spain and is also a large player in lead (Peru’s largest producer) and zinc (second largest after Antamina). Silver output for the company was 19.5 million oz last year, which is very significant considering the company does not position itself as a precious metals producer. “Silver is a very important part of our sales if compared to other base metals companies,” said Juan José Herrera, general manager, Volcan.
One of the main operations of Volcan, which invested an overall $226 million last year, is within the historic mining district of Cerro de Pasco. Its contribution to the company’s total production has been decreasing in recent years due to lower grades, while the Yauli and Chungar mines have grown to become Volcan’s most important sites. However, Cerro de Pasco still has significant reserves and could be in operation for the next couple of decades, provided a solution is found to relocate the town of Cerro de Pasco.
“Cerro de Pasco has a lot of potential still,” Herrera said. “The mine is now going underground and we are doing exploration to the north and south of the operation. One of the walls of the pit is also being considered for exploitation. Our reserves at Cerro de Pasco currently stand at 95.3 million mt and our resources are 28.6 million mt. Right now, the underground mine is the one supplying the ore. We have at least 20 years of life left but we are reviewing the planning and the setup of the mine.”
After Volcan, the main silver players in Peru are Hochschild (14.9 million oz), Antamina (14.9 million oz), Buenaventura (13.7 million oz) and Pan American Silver (7 million oz).
Hochschild, a company that also has gold production and operations in Mexico and Argentina, is investing heavily in exploration ($50 million last year according to company sources; 2011 budget should be similar). Ignacio Bustamante, CEO, explains how the company wants to move to the next level after its successful IPO in 2007.
“In the past, the organization has focused on ‘company maintainers,’ narrow-vein epithermal low-sulphidation deposits that can produce 5 to 10 million oz/y each. We will continue focusing on these, but we are also looking for what we call ‘company makers.’ These are deposits that once one of them is in operation we can double our production. With the knowledge we have accumulated over the years, we believe we are well positioned to find high-sulphidation deposits and gold-copper porphyries.”
Right now the most advanced projects under Hochschild in Peru are Azuca and Inmaculada, both of which have their scoping studies completed.
With regard to Pan American Silver, the Vancouver-based company has three operating mines in Peru: Quiruvilca, Huarón and Morococha. Following the corporation’s acquisition of Aquiline in 2009 (by which it took control of the Navidad project in Argentina, the world’s largest undeveloped silver deposit) Pan American Silver also got hold of the Pico Machay gold project in Peru, on which work is being undertaken to define the ore body.
“In order to grow, the best strategy is to always be active in all fronts: exploration, construction and production. Looking at the future, both Morococha and Huarón have long-lasting resources,” said Enrique Ramírez, general manager, Pan American Silver in Peru.
Ramírez underlines the importance of efficiency for the long term. “Our growth defines very well what Pan American Silver is,” Ramírez said. “We have had 15 years of uninterrupted expansion since the company was created. Other companies have their ups and downs, but not consistent growth. Every year we are fast-tracking new projects into production. When we make promises to the market, we always deliver. At current prices, anyone can put a silver mine into operation, but if prices decrease again, many companies will be out of the business. Not us. We are a low cash-cost silver producer, which is very important.”
Finally, another primary silver player, Silver Standard, is advancing its San Luis project with the aim of having production in Peru soon. The feasibility study for the project estimates a capex of $90 million and production rates of 78,000 oz of gold and 1.86 million oz of silver over a 3.5-year mine life. San Luis is 70%-owned by Silver Standard, the remaining 30% being with Esperanza Resources.
Looking at Exploration
While Peru has attracted a number of world-class operators in the last couple of decades, a few more are following the developments of the country very closely and are even conducting their own exploration programs. These include Peñoles, Teck, Iamgold and Inmet Mining among others.
As the M&A market is becoming more expensive, some companies are increasingly moving back to where it all begins: generative work. “With gold at $1,300/oz, people think twice before selling anything. Yet, I have not seen many companies support early stage exploration like Iamgold does, because of the lag time in the discovery process,” said Louis Gariépy, exploration manager, Iamgold. “We look for properties with the potential of hosting at least 2 million oz of gold and can produce 150,000 to 200,000 oz/y.”
Inmet Mining, a copper and zinc producer that is in the process of merging with Lundin to form a new company called Symterra, has also had an active exploration office in Peru in the last years. Percy Arhuata, general manager, believes there is still a lot of space for new discoveries. “There is great potential around the known world-class copper projects to do brownfield exploration,” Arhuata said. “There are old districts that were explored for zinc and lead and where today geologists are finding gold. We could enter old districts with new geological ideas. Finally, many areas in Peru are very difficult to access, which means that not much work has been done there.”
Peru therefore combines the excellence of a proven mining jurisdiction with the excitement of a still highly under-explored geology. In this context, major companies from around the world will surely view the country as one of their premiere destinations for new mining opportunities.